EV sales in China have been slated to top 220,000 units during the current year, and in the process overtake the U.S. as the biggest EV market in the world. EV sales in China through the first ten months of 2015 clocked in at 171,415 units, a blistering 290% Y/Y growth. Mainland China is the world’s largest auto market with more than 20 million vehicles sold every year. Perhaps it was only a matter of time before EVs shared the same tag as their gasoline-powered counterparts.

Part of the reason why the popularity of EVs in the country is growing in leaps and bounds can be chalked up to heavy subsidies and tax cuts by the Beijing government. The Chinese government plans to roll back subsidies over the next five years to force EV manufactures such as BYD (Build Your Dream) and BAIC to lower their prices instead of merely using government subsidies to fatten their bottom lines.

Meanwhile, Tesla (NASDAQ:TSLA) has struggled mightily trying to break into the Chinese market. China has been the only country where Tesla has been reporting excessive inventory, at a time when the company has generally struggled to keep up with exploding demand in other countries. Tesla shipped 4,800 Model S sedans to China in 2014, but only managed to sell only 2,499 units, or just 52% of shipments. Less than 5% of Tesla’s sales come from China, despite the fact that China now owns 37% of the global EV market.

Tesla’s initial failure in China has been pinned on a number of factors including simple logistics, cultural issues, and government backing. Elon Musk is on record saying that he was misled by speculators and resellers in China who placed orders but later cancelled when their orders arrived.

Other factors have also been implicated, including the backseat of Model S which is nothing to write home about. Apparently the high middle class and high-end customers that Tesla has been targeting in the Middle Kingdom love being chauffeured around. Model S offers generous performance perks and an impressive front seat but the backseat has been overlooked. Tesla later started offering a luxurious Model S backseat for an extra $2,000 for the Chinese consumer.

The Chinese government generally tends to favor local companies over foreign ones. The Beijing government has been aggressively pushing for increased use of green cars including EVs to counter the environmental pollution problem that continues to plague the country. Tesla has generally had a tough time competing with heavily subsidized EVs manufactured locally. The fact that Tesla was recently forced to hike the price of Model S in the country by 5% to 673,000 yuan ($105,000) certainly does not help matters.

Then there is infrastructure problem. Most people in China do not own private garages and park their cars in public garages, which is obviously an awkward arrangement for a person who owns an EV that needs to be recharged almost every day. Tesla has responded to the problem by widening its network of superchargers in the country and offering free home charging.

But the biggest hurdle for Tesla has simply been misgivings by the Chinese people about adopting a new technology. The Chinese people are traditionally a conservative lot, and are frequently slow to adopt new technologies. But this now appears to be rapidly changing. The fact that the Chinese EV market is opening up so rapidly is good tidings for Tesla and its ambitions to become a mass producer of EVs.

The growing popularity of EVs in China seems to be rubbing off on Tesla as well. Tesla managed to sell 1,345 units in the country during the third quarter after selling just 797 and 883 units during the first and second quarters, respectively. Elon Musk is optimistic that Tesla sales in China can match those by the company in the U.S. in maybe 5-6 years.

Tesla hopes to launch Model 3, the company’s first mass-produced car, as early as March 2016. Tesla plans to sell the car at just $35,000, which could help the company to finally compete on an even keel with Chinese EV manufacturers. Given the confluence of an exploding EV market in China and an affordable EV from Tesla, it probably won’t come as a surprise if Tesla’s sales in China end up supplanting those in the U.S. in as little as 3-4 years.

Tesla Stock Articles & Video

Tesla's SolarCity deal has definitely added risk to the equation due to debt that has been added to the balance sheet. Musk's claims about low Model 3 prices, addressing the expanding debt and the new cheaper solar roof are over-hyped. Don't expect the $7,500 grant currently available in the US to continue.

Tesla shares have been sliding in the aftermath of Trump becoming the US president-elect. Investors are worried about Trump's stance regarding the need for government incentives for the clean energy sector. GM and Toyota recently announced that they will soon launch mass-market Electric Vehicles (EV).

Shares of SolarCity and Tesla gained yesterday after the shareholders approved the merger of the two companies. With the merger, Tesla has moved one step closer to becoming a clean energy company. The deal will open up several opportunities for the merged entity in the long run, but the short run challenges remain strong.

Donald Trump may be good for Tesla in that he may reward automobile companies that are exclusively building their companies in the US. Tesla's third quarter was impressive from a margin and volume perspective. Finally, Model X commitments are winding down. The Model 3 has to come good on volume shipments and margins as any struggles here would tank the share price going forward.

Tesla is acquiring German company Grohmann Engineering, a leader in highly automated methods of manufacturing. The deal prepares the way for Tesla Advanced Automation Germany, which will boost the company's mass production capability. Tesla CEO Elon Musk hinted at plans to establish Gigafactory 2, a large-scale car and battery production site in Europe.

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